What is the Process of Loan Settlement in India?


29 Jul 2019 | 5 min read

Are you looking for a loan settlement due to an unfortunate circumstance?

Have you not yet googled the procedure?

Here, we will tell you the know-how of it.

You had taken a loan to be repaid over a certain amount of time. Things were going smooth, and over a period of time, you find yourself in a situation where you find it challenging to pay off the debts. You approach the lender to discuss your problem. It is likely; the lender may offer you a choice of One Time Settlement. 

Let us take two examples, to understand the concept better:

Example 1:

Ms. Radhika, a Mumbai based Professor, took a home loan of Rs.20 lakh at an interest rate of 8.5%, for a tenure of 10 years, for which she was paying an EMI of Rs 24,797. It was the 5th year of her existing loan for which she had paid the initial amount. Due to an unfortunate situation of critical illness, she is not in a position to continue paying off the debts. She approached the bank and explained the case to the higher officials. The lender analyzed the situation and writes off the difference between the paid amount and the amount that is due. She is now free from debt.

Example 2:

Mr. Purohit (a resident of New Delhi) availed a Personal Loan of Rs.10 lakh for the expansion of his business at an interest rate of 12%. The loan was sanctioned for 5 years, towards which he was paying an EMI of Rs 22,245. The business incurred several losses and was finally shut down. Mr. Purohit now finds it difficult to pay off the loan instalments. He approached the bank and told the scenario of going bankrupt. 

The bank sent the officials at the site of business, to verify the matter. The officials notified the bank about the exact situation. Mr. Purohit offered the bank to settle the loan by paying a lump-sum amount. The bank officials agreed to the offer, considering the bankruptcy situation of his business. Mr. Purohit has paid an amount less than the agreed loan amount and has also received a No objection certificate (NOC) from the bank. 

From the above two examples, it is clear that the Loan Settlement lets you off the hook from paying the loan instalments further, if the ongoing situation is extremely difficult, and it does not permit to take it further.

*Over 2 lakh crore bad loan have been settled after the Insolvency and Bankruptcy Code (IBC) came into being in 2016

How to negotiate for settling the debt amount?

If you have decided to go for a loan settlement with your lender, the next step is to decide to either do it yourself or to hire a professional for this. Whether you yourself take the process ahead or hire a professional for the same - the key point in negotiating successfully is to make the lender appear that you're really in a bad financial position. If there is a severe medical condition, loss of employment, or an accident, the lender will consider the situation. The higher authorities will have a look at the genuineness of the case and may decide to write off the difference between the paid and the remaining amount. It might also offer the choice of completing six months of non-payment of dues. The bank then reports a loss, and the borrower is let off the hook. 

How to settle your loan account?

  1. Approach the bank and convey genuine reasons for going ahead with the loan settlement process.
  2. Furnish all the relevant documents to support your statement.
  3. Convince the lender that you are genuinely, not in a position to pay off the debts and would like to settle the loan by paying off a lump sum amount.
  4. This is what makes the debt settlement attractive to the lender, and might work in your favour if they agree to it.
  5. The bank officials might write off the loan amount or can give you a choice on completion of 6 months of non-payment of dues.
  6.  Keep copies of all your written communication with the lender.
  7. Even if the communication happens over the phone, send an acknowledgement mentioned during the call. Always have everything in writing.
  8. Keep all the copies of the settlement letter, cheque/DD, or pay order of your submission.
  9. Post the settlement, obtain an NOC, and collect all your post-dated cheques, if any.
  10.  Collect your loan account statement that shows zero balance.

The Impact of loan settlement on the CIBIL score

When your loan is written off by the lender, it is reported to the CIBIL. The CIBIL then term it as “settled”, instead of closing the transaction. When the loan is termed as settled, it is kept on the record by CIBIL for 7 years. It is viewed as negative credit behaviour, and the borrower's credit score drops by 75-100 points.

Things you should remember 

  • While applying for loan, assess your financial status and borrow within your repayment capacity. Don’t run the temptation of over borrowing and overspending.
  • Settlement option is provided only if you are not able to repay the loan because of genuine reasons and the lender wants to finish the deal with whatever they can get from you.
  • With a status of ‘settled’, your credit score will decline considerably. As a result, you will find it difficult to get any credit in the future. 

A way out for loan settlement

Due to unforeseen circumstances, if the current situation does not allow you to repay the debts, do not jump for loan settlement at the first chance. If your loan is termed as settled, you cannot apply for a loan for the next seven years. The CIBIL holds the record for seven years of the loan settlement, and lenders can reject the loan application during that period. Alternatively, try to liquidate some part of your asset to pay off the loan. Reach out to family and friends for monetary assistance and by all means, avoid loan settlement. Keep the loan settlement as the last option. 

Speak to your lender to extend your repayment period. You can also request to waive off the interest for a certain period. Once a decision has been made, keep a check on your credit score, to understand the current situation. Try to pay off the debts and maintain good credit behaviour. 

As another option, you can have plan B in place. You can provide something as collateral, even if the bank does not require you to do that. On the other hand, if you have taken an insurance plan along with the loan, to cater to the emergency situation, this can be a savior for you. The insurance will take care of the loan payments, till the time you are capable of making the repayment yourself. This will save you from getting into defaulter's list, and it will not be reported to the CIBIL. This way, you will be not be highlighted of having bad credit behavior.

*Data Source- Economic Times

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